Bonus cuts bring down life insurance policy payouts: Caroline Merrell reports on a shock for policyholders and warns more may be on the way

Millions of people who raced to buy life policies 10 years ago before the abolition of tax relief on contributions are facing cuts in final payouts as their policies mature this year.

All the life offices that have declared bonuses so far have made cuts in the payouts of 10- year policies, with some cuts reaching nearly 8 per cent. But overall returns are still above 10 per cent.

Philip Scott, general manager of Norwich Union, said: 'Bonuses are going to come down still further.'

Payouts on long-term 25- year policies have been maintained.

Norwich Union believes that cuts in payouts on all policies will continue for at least a further two years.

According to its calculations it expects the return on its 10- year with-profits policies to fall by more than 3 per cent to 8.5 per cent over the next two years.

It expects the return on its 25-year policies to fall by about 0.5 per cent over the same period to 12.3 per cent.

Norwich Union predicts that all the returns on with- profits policies will suffer the same type of falls.

Mr Scott said the returns it was giving investors had been boosted by the performance of the British stock market during the year.

He added that pounds 115m worth of 10-year policies would be maturing this year from his company. The abolition of tax relief 10 years ago and the rush to beat the deadline meant that the total amount of money it anticipated paying out during the year would be pounds 313m.

The life offices were keen to emphasise that the performance of with-profits endowments, the vast majority of which were purchased on the back of mortgages, would be enough to pay off the loan.

General Accident, Friends Provident, Clerical Medical, Scottish Life, Norwich Union and Tunbridge Wells Equitable have all declared their bonuses for 1994.

So far General Accident maintains its position as the highest paying life office. The payout on a 25-year policy with monthly premiums of pounds 50 maturing next year is up slightly on last year's payout of pounds 110,403. A 15-year policy would pay pounds 25,910, down more than 5 per cent over last year.

GA has increased payouts to investors by nearly half over the past five years.

It has also cut the bonus rate for the 40,000 people with pounds 500m invested in its Portfolio bond to 7.5 per cent.

------------------------------------------------------------------- BONUS DECLARATIONS SO FAR ------------------------------------------------------------------- 25-year (% change) 10-year (% change) General Accident pounds 110,639 (0.2) pounds 11,065 (-0.4) Scottish Life pounds 105,658 (1.6) pounds 10,175 (-2) Friends Provident pounds 103,981 (0.2) pounds 11,182 (-2.6) Clerical Medical pounds 101,665 (0) pounds 10,984 (-7.6) Norwich Union pounds 98,423 (0.8) pounds 11,815 (-4.6) -------------------------------------------------------------------